Yandex Announces Fourth Quarter and Full-Year 2014 Financial Results

MOSCOW and AMSTERDAM, Netherlands, Feb. 18, 2015 (GLOBE NEWSWIRE) -- Yandex (Nasdaq:YNDX), one of Europe's largest internet companies and the leading search provider in Russia, today announced its financial results for the fourth quarter and the full year ended December 31, 2014.

"The company performed well in the fourth quarter and demonstrated another full year of excellent results, despite the difficult macroeconomic environment. We continue to develop our existing services and products as well as new business models, such as the recently launched Yandex Data Factory," said Arkady Volozh, Chief Executive Officer of Yandex. "Although we face challenging economic headwinds, including substantial currency fluctuations, we are managing Yandex for the long term. We will continue to improve monetization, pursue cost efficiencies in our core business and manage our forex exposure, while investing into critical growth areas such as mobile and advertising technologies."

The following table provides a summary of key financial results for the three months and twelve months ended December 31, 2013 and 2014:

In RUR millions

Three months
ended December 31,

Twelve months
ended December 31,

2013

2014

Change

2013

2014

Change

Revenues

12,086

14,667

21%

39,502

50,767

29%

Ex-TAC revenues2

9,258

11,572

25%

31,652

39,691

25%

Income from operations

3,921

4,478

14%

12,837

15,323

19%

Adjusted EBITDA2

5,148

6,078

18%

17,367

21,052

21%

Net income

3,346

7,572

126%

13,474

17,020

26%

Adjusted net income2

3,519

3,967

13%

12,140

13,751

13%

1 Pursuant to SEC rules regarding convenience translations, Russian ruble (RUR) amounts have been translated into U.S. dollars at a rate of RUR 56.2584 to $1.00, the official exchange rate quoted as of December 31, 2014 by the Central Bank of the Russian Federation.

2 The following measures presented in this release are "non-GAAP financial measures": ex-TAC revenues; adjusted EBITDA; adjusted EBITDA margin; adjusted ex-TAC EBITDA margin; adjusted net income; adjusted net income margin and adjusted ex-TAC net income margin. Please see the section headed "Use of Non-GAAP Financial Measures" below for a discussion of how we define these measures, as well as reconciliations at the end of this release of each of these measures to the most directly comparable US GAAP measures.

Yandex's operating costs and expenses consist of cost of revenues, product development expenses, sales, general and administrative expenses (SG&A), and depreciation and amortization expenses (D&A). Apart from D&A, each of the above expense categories includes personnel-related costs and expenses, relevant office space rental, and related share-based compensation expense. Increases across all cost categories, excluding D&A, reflect investments in overall growth, including personnel. In Q4 2014, Yandex added 102 full-time employees, an increase of 2% from September 30, 2014, and up 15% from December 31, 2013. The total number of full-time employees was 5,616 as of December 31, 2014.

Costs of revenues, including traffic acquisition costs (TAC)

In RUR millions

Three months
ended December 31,

Twelve months
ended December 31,

2013

2014

Change

2013

2014

Change

TAC:

Related to the Yandex ad network

2,023

2,102

4%

5,377

7,520

40%

Related to distribution partners

805

993

23%

2,473

3,556

44%

Total TAC

2,828

3,095

9%

7,850

11,076

41%

Total TAC as a % of total revenues

23.4%

21.1%

19.9%

21.8%

Other cost of revenues

713

912

28%

2,756

3,260

18%

Other cost of revenues as a % of revenues

5.9%

6.2%

7.0%

6.4%

Total cost of revenues

3,541

4,007

13%

10,606

14,336

35%

Total cost of revenues as a % of revenues

29.3%

27.3%

26.8%

28.2%

TAC decreased slightly as percentage of total revenues from 23.4% in Q4 2013 to 21.1% in Q4 2014 and grew only 9% compared with Q4 2013. The slowdown in the growth of partner TAC was mostly due to changes in partner revenue mix. Partner TAC includes traffic acquisition costs related to both our text-based and our display advertising networks.

Other cost of revenues in Q4 2014 increased 28% compared with Q4 2013, primarily reflecting growth of personnel costs and an increase in our rental expenses, attributable to additional office space that we started to lease in May 2014 and to the material appreciation of the U.S. dollar during Q4 2014, given that the rent for our Moscow headquarters is U.S. dollar-denominated.

Product development

In RUR millions

Three months
ended December 31,

Twelve months
ended December 31,

2013

2014

Change

2013

2014

Change

Product development

1,651

2,673

62%

5,827

8,842

52%

As a % of revenues

13.7%

18.2%

14.8%

17.4%

Growth in product development costs in Q4 2014 primarily reflects growth of personnel expenses and increased rental costs, attributable to additional office space that we started to lease in May 2014 and to the material appreciation of the U.S. dollar during Q4 2014, given that the rent for our Moscow headquarters is U.S. dollar-denominated. In 2014, development headcount increased 14% from 2,924 as of December 31, 2013, to 3,329 as of December 31, 2014, with 57 employees added since September 30, 2014.

Selling, general and administrative (SG&A)

In RUR millions

Three months
ended December 31,

Twelve months
ended December 31,

2013

2014

Change

2013

2014

Change

Sales, general and administrative

1,983

2,303

16%

6,537

7,782

19%

As a % of revenues

16.4%

15.7%

16.5%

15.3%

SG&A costs grew slower than revenue, increasing by 16% in Q4 2014 compared to Q4 2013. Personnel expenses and the growth in rental costs for our Moscow headquarters related to the SG&A category were offset by decreases in advertising and marketing spend.

Share-based compensation (SBC) expense

SBC expense is included in each of the cost of revenues, product development, and SG&A categories discussed above.

In RUR millions

Three months
ended December 31,

Twelve months
ended December 31,

2013

2014

Change

2013

2014

Change

SBC expense included in cost of revenues

18

32

78%

61

101

66%

SBC expense included in product development

128

254

98%

435

780

79%

SBC expense included in SG&A

77

90

17%

258

329

28%

Total SBC expense

223

376

69%

754

1,210

60%

As a % of revenues

1.8%

2.6%

1.9%

2.4%

Total SBC expense increased 69% in Q4 2014 compared with Q4 2013. The increase is primarily related to the material appreciation of the U.S. dollar during Q4 2014 as well as to new equity-based grants made in 2013-2014.

Depreciation and amortization (D&A) expense

In RUR millions

Three months
ended December 31,

Twelve months
ended December 31,

2013

2014

Change

2013

2014

Change

Depreciation and amortization

990

1,206

22%

3,695

4,484

21%

As a % of revenues

8.2%

8.2%

9.4%

8.8%

D&A expense increased 22% in Q4 2014 compared with Q4 2013 and primarily reflected investments in servers and data centers made in 2013 and early 2014.

As a result of the factors described above, income from operations was RUR 4.5 billion ($79.6 million) in Q4 2014, a 14% increase from Q4 2013, while adjusted EBITDA reached RUR 6.1 billion ($108.0 million) in Q4 2014, up 18% from Q4 2013.

Interest income, net in Q4 2014 was RUR 257 million, down from RUR 414 million in Q4 2013, mainly due to interest expenses related to our convertible notes issued in December 2013 and January 2014.

Foreign exchange gain in Q4 2014 was RUR 4,707 million, compared with a foreign exchange gain of RUR 99 million in Q4 2013. This gain is due to the material appreciation of the U.S. dollar during Q4 2014 from RUR 39.3866 to $1.00 on September 30, 2014, to RUR 56.2584 to $1.00 on December 31, 2014. Yandex's Russian operating subsidiaries' functional currency is the Russian ruble, and therefore changes due to exchange rate fluctuations in the ruble value of these subsidiaries' monetary assets and liabilities that are denominated in other currencies are recognized as foreign exchange gains or losses in the income statement. Although the U.S. dollar value of Yandex's U.S. dollar-denominated assets and liabilities was not impacted by these currency fluctuations, they resulted in an upward revaluation of the ruble equivalent of these U.S. dollar-denominated monetary assets and liabilities in Q4 2014.

Income tax expense for Q4 2014 was RUR 2,338 million, up from RUR 1,083 million in Q4 2013. Our effectivetax rate of 23.6% in Q4 2014 was generally in line with the effective tax rate in Q3 2014. Our effective tax rate was higher in 2014 than in 2013 because in Q1 2014 we began to accrue for a 5% dividend withholding tax on the portion of the current year profit of our principal Russian operating subsidiary that we considered not to be permanently reinvested in Russia.

During Q4 2014, we repurchased $100 million in principal of our 1.125% convertible senior notes due 2018 for approximately $85.6 million.

The totalnumber of shares issued and outstanding as of December 31, 2014 was 317,643,671, including 255,592,322 Class A shares, 62,051,348 Class B shares, and one Priority share and excluding 12,378,083 Class A shares held in treasury and all Class C shares outstanding solely as a result of the conversion of Class B shares into Class A shares; all such Class C shares will be cancelled. There were also employee share options outstanding to purchase up to an additional 5.0 million shares, at a weighted average exercise price of $5.41 per share, of which options to purchase 4.9 million shares were fully vested; equity-settled share appreciation rights equal to 2.4 million shares, at a weighted average measurement price of $27.77, 0.6 million of which were fully vested; and restricted share units covering 3.9 million shares, of which restricted share units to acquire 0.9 million shares were fully vested.

Financial outlook

The current outlook is limited to quarterly guidance because of high level of uncertainty in the current macroeconomic situation.

Currently we expect revenue to grow approximately 15% in Q1 2015.

This outlook reflects our current and preliminary view, based on the trends that we currently see.

Conference Call Information

Yandex's management will hold an earnings conference call on February 18, 2015 at 8:00 AM U.S. Eastern Time (4:00 PM Moscow time; 1:00 PM London time).

To access the conference call live, please dial:

US: +1 877 280 2342
UK: +44 (0) 20 3427 1912
Russia: 8 800 500 9311

Passcode: 3861283#

A replay of the call will be available through February 25, 2015. To access the replay, please dial:

US: +1 866 932 5017
Russia/International: +44 (0) 20 3427 0598

Passcode: 3861283#

A live and archived webcast of this conference call will be available at

This press release contains forward-looking statements that involve risks and uncertainties. These include statements regarding our anticipated revenues for Q1 2015. Actual results may differ materially from the results predicted or implied by such statements, and our reported results should not be considered as an indication of future performance. The potential risks and uncertainties that could cause actual results to differ from the results predicted or implied by such statements include, among others, macroeconomic and geopolitical developments affecting the Russian economy, competitive pressures, changes in advertising patterns, changes in user preferences, changes in the political, legal and/or regulatory environment, technological developments, and our need to expend capital to accommodate the growth of the business, as well as those risks and uncertainties included under the captions "Risk Factors" and "Operating and Financial Review and Prospects" in our Annual Report on Form 20-F for the year ended December 31, 2013, which is on file with the Securities and Exchange Commission and is available on our investor relations website at http://ir.yandex.com/sec.cfm and on the SEC website at www.sec.gov. All information in this release and in the attachments is as of February 18, 2015, and Yandex undertakes no duty to update this information unless required by law.

USE OF NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which are prepared and presented in accordance with US GAAP, we present the following non-GAAP financial measures: ex-TAC revenue, adjusted EBITDA, adjusted EBITDA margin, adjusted ex-TAC EBITDA margin, adjusted net income, adjusted net income margin and adjusted ex-TAC net income margin. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with US GAAP. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP financial measures to the nearest comparable US GAAP measures", included following the accompanying financial tables. We define the various non-GAAP financial measures we use as follows:

Adjusted EBITDA means net income plus (1) depreciation and amortization, (2) share-based compensation expense, (3) accrual of expense related to the contingent compensation that was payable to employees in connection with our acquisition of the mobile software business of SPB Software and our acquisition of KitLocate (described below) and (4) provision for income taxes, less (A) interest income and (B) other income/(expense)

Adjusted net income means US GAAP net income plus (1) SBC expense adjusted for the income tax reduction attributable to SBC expense, (2) accrual of expense related to the contingent compensation that was payable to certain employees in connection with our acquisition of the mobile software business of SPB Software and our acquisition of KitLocate (described below), (3) foreign exchange losses (less foreign exchange gains) adjusted for the (reduction) increase in income tax attributable to the foreign exchange losses / (gains), (4) impairment of investments in equity securities adjusted for the related reduction in income tax and (5) amortization of debt discount related to our convertible debt adjusted for the related reduction in income taxes; less (1) gain from the sale and deconsolidation of equity investments, (2) gain from repurchases of our convertible notes adjusted for the related increase in income tax

Adjusted net income margin means adjusted net income divided by US GAAP revenues

These non-GAAP financial measures are used by management for evaluating financial performance as well as decision-making. Management believes that these metrics reflect the organic, core operating performance of the company, and therefore are useful to analysts and investors in providing supplemental information that helps them understand, model and forecast the evolution of our operating business.

Although our management uses these non-GAAP financial measures for operational decision making and considers these financial measures to be useful for analysts and investors, we recognize that there are a number of limitations related to such measures. In particular, it should be noted that several of these measures exclude some costs, particularly share-based compensation, that are recurring. In addition, the components of the costs that we exclude in our calculation of the measures described above may differ from the components that our peer companies exclude when they report their results of operations.

Below we describe why we make particular adjustments to certain US GAAP financial measures:

TAC

We believe that it may be useful for investors and analysts to review certain measures both in accordance with US GAAP and net of the effect of TAC, which we view as comparable to sales commissions but, unlike sales commissions, are not deducted from US GAAP revenues. By presenting revenue, adjusted EBITDA margin and adjusted net income margin net of TAC, we believe that investors and analysts are able to obtain a clearer picture of our business without the impact of the revenues we share with our partners.

SBC

SBC is a significant expense item, and an important part of our compensation and incentive programs. As it is a non-cash charge, however, and highly dependent on our share price at the time of equity award grants, we believe that it is useful for investors and analysts to see certain financial measures excluding the impact of these charges in order to obtain a clear picture of our operating performance.

Acquisition-related costs

We may incur expenses in connection with acquisitions that are not indicative of our recurring core operating performance. In particular, we were required under US GAAP to accrue as expense the contingent compensation that was payable to certain employees in connection with our acquisition of the mobile software business of SPB Software in November 2011 and our acquisition of KitLocate, the developer of an energy efficient geolocation technology for mobile devices, in March 2014. The aggregate amount of such contingent compensation paid in connection with SPB Software acquisition was $14.1 million, $7.1 million of which was paid in November 2012, $4.1 million of which was paid in February 2013, and $2.9 million of which was paid in November 2013. The maximum aggregate amount of contingent compensation to be paid in connection with the KitLocate acquisition is $3.9 million payable upon the continued employment of the sellers. We have eliminated these acquisition-related expenses from adjusted EBITDA and adjusted net income to provide management and investors a tool for comparing on a period-to-period basis our operating performance in the ordinary course of operations.

Foreign exchange gains and losses

Because we hold significant assets in currencies other than our Russian ruble operating currency, and because foreign exchange fluctuations are outside of our operational control, we believe that it is useful to present adjusted net income and related margin measures excluding these effects, in order to provide greater clarity regarding our operating performance.

Impairment of investment in equity securities

Adjusted net income for the quarter ended September 30, 2014, excludes a loss from the impairment of our equity investment in Blekko Inc. We review our investments quarterly for indicators of other-than-temporary impairment. In the quarter ended September 30, 2014, our review identified certain adverse external and internal events indicating that the decline in fair value of our investment in Blekko Inc. is now other-than-temporary and recorded an impairment charge of $18.5 million. We believe that it is useful to present adjusted net income and related margin measures excluding impacts not related to our core operations.

Gain from the sale and deconsolidation of equity investments

Adjusted net income also excludes a gain in the quarter ended September 30, 2013 from deconsolidation of Yandex.Money following the sale of a 75% stake in Yandex.Money to Sberbank on July 4, 2013. We believe that it is useful to present adjusted net income and related margin measures excluding the effect of this significant item in order to provide a clearer picture of our underlying operating performance.

Amortization of debt discount

We also adjust net income for interest expense representing amortization of the debt discount related to our convertible notes issued in Q4 2013 and Q1 2014. We have eliminated this expense from adjusted net income as it is non-cash in nature and is not indicative of our ongoing operating performance.

Gain from repurchases of convertible debt

Adjusted net income also excludes a gain from repurchase of $150 million in principal of our 1.125% convertible senior notes due 2018 for approximately $131.3 million that we recorded in the year ended December 31, 2014. We have eliminated this gain from adjusted net income as it is not indicative of our ongoing operating performance.

The tables at the end of this release provide detailed reconciliations of each non-GAAP financial measure we use to the most directly comparable US GAAP financial measure.

YANDEX N.V.Unaudited Condensed Consolidated Balance Sheets

(in millions of Russian rubles and U.S. dollars, except share and per share data)

Less: reduction in income tax attributable to impairment of investment in equity securities

--

--

n/m

--

(175)

n/m

Less: gain from sale and deconsolidation of equity investments

--

--

n/m

(2,067)

--

-100%

Less: gain from repurchases of convertible debt

--

(548)

n/m

--

(548)

n/m

Add: increase in income tax attributable to gain from repurchases of convertible debt

--

137

n/m

--

137

n/m

Add: amortization of debt discount

24

243

n/m

24

811

n/m

Less: reduction in income tax attributable to amortization of debt discount

(6)

(56)

n/m

(6)

(190)

n/m

Adjusted net income

3,519

3,967

13%

12,140

13,751

13%

Reconciliation of Adjusted EBITDA Margin and Adjusted Ex-TAC EBITDA Margin to US GAAP Net Income Margin

In RUR millions

US GAAP
Actual Net
Income

Net Income
Margin (1)

Adjustment (2)

Adjusted
EBITDA

Adjusted
EBITDA
Margin (3)

Adjusted Ex-
TAC
EBITDA
Margin (4)

Three months ended December 31, 2014

7,572

51.6%

(1,494)

6,078

41.4%

52.5%

Twelve months ended December 31, 2014

17,020

33.5%

4,032

21,052

41.5%

53.0%

(1) Net income margin is defined as net income divided by total revenues.
(2) Adjusted to eliminate depreciation and amortization expense, SBC expense, expense related to contingent compensation, interest income, net, other (expense)/income, net, and provision for income taxes. For a reconciliation of adjusted EBITDA to net income, please see the table above.
(3) Adjusted EBITDA margin is defined as adjusted EBITDA divided by total revenues.
(4) Adjusted ex-TAC EBITDA margin is defined as adjusted EBITDA divided by ex-TAC revenues. For a reconciliation of ex-TAC revenues to GAAP revenues, please see the table above.

Reconciliation of Adjusted Net Income Margin and Adjusted Ex-TAC Net Income Margin to US GAAP Net Income Margin

In RUR millions

US GAAP
Actual Net
Income

Net Income
Margin (1)

Adjustment (2)

Adjusted
Net Income

Adjusted
Net Income
Margin (3)

Adjusted Ex-
TAC Net
Income
Margin (4)

Three months ended December 31, 2014

7,572

51.6%

(3,605)

3,967

27.0%

34.3%

Twelve months ended December 31, 2014

17,020

33.5%

(3,269)

13,751

27.1%

34.6%

(1) Net income margin is defined as net income divided by total revenues.
(2) Adjusted to eliminate SBC expense (as adjusted for the income tax reduction attributable to SBC expense), expense related to contingent compensation, foreign exchange gain (as adjusted for the reduction in income tax attributable to the gain), impairment of investment (as adjusted for reduction in income tax attributable to impairment of investment in equity securities), gain from sale and deconsolidation of equity investments, gain from repurchases of convertible debt and amortization of debt discount (as adjusted for the reduction in income tax attributable to the expense). For a reconciliation of adjusted net income to net income, please see the table above.
(3) Adjusted net income margin is defined as adjusted net income divided by total revenues.
(4) Adjusted ex-TAC net income margin is defined as adjusted net income divided by ex-TAC revenues. For a reconciliation of ex-TAC revenues to US GAAP revenues, please see the table above.